Interest: The Price of Money, Working For You or Against You
Interest is compensation for the use of money — paid by a borrower to a lender, or by a bank to a
saver — quoted as a percentage of the principal. It is the engine inside nearly every financial
instrument you will ever touch, and it comes in two species that behave very differently over
time. This calculator handles the species that matters in real life — compound interest — with
contributions, and with the tax and inflation adjustments that decide what growth is actually
worth.
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Simple interest: the straight line
Simple interest is computed only on the original principal:
interest = principal × rate × time. Borrow $1,000 at 8% simple and you owe $80 of interest
after one year — $1,080 in total — and exactly $80 more for every additional year: $1,160 after
two. It is clean, predictable, and rare: some short-term notes and a few bonds use it, but
savings accounts, credit cards, mortgages, and investments essentially never do. When everyday
speech says "interest," it almost always means the compounding kind.
Compound interest: interest on interest
Compounding adds each period's interest to the principal, so the next period's interest is earned
on a larger base. The same $1,000 at 8%, compounded annually, reaches $1,080 after year one, then
earns 8% on $1,080 in year two — $86.40, not $80 — landing at $1,166.40. That extra $6.40 looks
trivial; stretched over decades it is the entire story of long-term saving, and of long-term debt.
Frequency sharpens it: at a 20% rate, annual versus daily versus continuous compounding barely
differ in year one and steadily diverge after, with continuous compounding — the mathematical
limit — always on top. The honest summary of a rate is therefore its effective annual yield
(APY), which folds the frequency in; this calculator's engine works in exactly those effective
terms, so the schedule below is right for every frequency you can select.
The Rule of 72
For a ballpark doubling time, divide 72 by the rate: at 8%, money doubles in about
72 ÷ 8 = 9 years; at 6%, about 12; at 10%, about 7.2. The rule is sharpest between roughly
6% and 10% and serviceable well beyond. Run it in reverse, too — at 3% inflation, prices double
(and idle cash halves in buying power) in about 24 years, which is the quiet argument for
investing rather than hoarding.
Fixed vs. floating rates
A fixed rate is set at signing and never moves — this calculator assumes one. A floating rate
rides on a benchmark: in the U.S., the Federal Reserve's federal funds rate for policy, and SOFR
(the Secured Overnight Financing Rate, which replaced LIBOR after its 2023 phase-out) for much
commercial lending. Lenders price a margin above the benchmark as profit; deposit rates usually
sit a margin below it. When benchmarks move, floating-rate borrowers and savers feel it within a
period or two — the trade for the lower starting rates floating products often offer.
Contributions, taxes, and inflation — the three adjustments
Contributions are where habits beat windfalls: a modest monthly deposit, compounded for
decades, routinely outgrows a one-time lump sum — and deposits made at the beginning of each
period finish ahead of identical deposits at the end, because each one compounds for one extra
period. Taxes are skimmed as interest accrues — savings accounts, CDs, and most bonds pay
taxable interest (U.S. Treasury interest escapes state and local tax, but not federal). The drag
is larger than intuition suggests: $10,000 at 7% for 20 years becomes $38,696.84 untaxed, but
only $27,610.04 at a 25% marginal rate — the tax doesn't just take a quarter of the
interest, it takes a quarter of every future year's compounding on that interest too.
Inflation is the third hand in your pocket: U.S. prices have risen about 3% a year over the
long run (the S&P 500 has returned roughly 10% nominal over the same span), so a taxed
saver needs something like 4%+ just to stand still in real terms — which is precisely the
"buying power" figure this calculator reports alongside the nominal balance. For the deeper dive
on prices themselves, see the
inflation calculator,
and for the same engine without the tax and timing options, the
compound interest calculator.
FAQ
Simple or compound — which does this use?
Compound, at your chosen frequency from annually to continuously — the way real accounts work.
Beginning or end of period?
If your deposit lands on the 1st, choose beginning; if it lands after interest is credited, choose end. Beginning finishes one period's interest ahead per deposit.
Why is the taxed result so much smaller?
Because tax is taken every period, the amount left compounding is smaller every year after. $10,000 at 7% over 20 years: $38,696.84 untaxed vs. $27,610.04 at 25% tax.
What inflation rate should I use?
3% is the U.S. long-run average and the default here. Use 0 to see nominal results only.
Disclaimer: This calculator provides estimates for educational purposes only and does not constitute financial
or tax advice. It assumes a fixed rate and a constant tax rate applied to interest as it accrues; individual
tax treatment varies.